Seven in 10 use pension freedom to strip their entire savings

8th January 2016

Seven in 10 people using new pension freedoms are withdrawing their entire pension pot.

An increasing number of retirees have made the decision to take their entire savings as cash since the pension freedoms were introduced in April 2015 and over 120,000 pensions were taken between July and September, according to new figures from the regulator.

While the total number of people taking some of their fund under the freedoms has decreased, with no pots over £150,000 being full encashed – most likely because of the large tax charge that would entail – 68% of the pensions accessed were taken in one go. The remaining 32% were used to turn into income.

Of the 68% of pots that were entirely enchashed, 88% of them were small pots worth less than £30,000.

The data collected by the Financial Conduct Authority (FCA) showed 178,990 pensions have been accessed whether to take an income or take a cash lump sum, a drop of 13% on the figure recorded between April and July. The high number of people accessing pensions in the first three months of pension freedom was blamed on a build up of interest since chancellor George Osborne announced the plan in 2014 Budget.

Just 23,385 people used their pension to buy an annuity. However, many people who shunned annuities missed out on their guaranteed annuity rates (GARs) which pay out a high level of income if the annuity is purchased, often double the annuity rates offered today.

The FCA said 68% of GARs were not taken up in its sample of 15 providers and the trend was high in small pots where 79% of GARs were not taken advantage of.

Just over half of people taking advantage of pension freedom to go into drawdowm used an adviser (58%) even though drawdown means money remains invested.

Gareth James, head of technical resources at AJ Bell, said: ‘It is surprising that 68% of people accessing their pensions during this period fully encashed their fund.

‘Pensions are designed to provide a long term income in retirement so these figures suggest the pension freedoms might be encouraging the wrong sort of behaviour. Most of those full withdrawals are small pots of less than £30,000 so hopefully those people have other pension savings they are using for the long term but, if they don’t, they will potentially be left relying on the inadequate state pension alone.’